​​​​​​ESBG gives its opinion on crowdfunding in light of European Commission effort to address ways to boost financing to SMEs – the backbone of the EU 'real' economy

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BRUSSELS, 30 January 2015

​1. Preliminary Statement

​ESBG welcomes the initiative taken by the Commission and the industry on crowdfunding, especially in light of the steady growth this new industry has been experimenting in the last years.

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2. General Comments

As it has been duly noted by the European Commission in its Long-Term Financing Green Paper, the time and advantageous opportunities from crowdfunding are ripe as a number of developments, such as the credit crunch, an enabling technology and low returns on savings, combine to create favourable circumstances. The social factor in such participation and the fact that crowdfunding’s aim is also about building and benefiting the community is also becoming more and more powerful.

Such innovation can, however, give way to risks such as fraud, repayment and liquidity risks. The fragmented regulation that has been witnessed on crowdfunding platforms not only diminishes confidence and competence within the sector, but also entails the non-existence of investor protection provisions and thus may comprise a risk to consumers. This is especially true in the actual stage of industry development, where only little consolidation has occurred, and many small and less known platforms operate.

​ESBG considers that in order to take full profit of the potential and the great opportunities that crowdfunding poses, it is necessary to build a more all-encompassing regulation of the sector and a legal framework for crowd financing that includes first and foremost a clear definition of crowd-funding, along with investor protection provisions, consumer protection, platform licensing and supervision by financial authorities, pre-contractual information, cross border provision, and the introduction of quality labels and codes of conduct. ESBG would advocate for an appropriate and proportionate regulation in order to both safeguard the advantages crowdfunding platforms retain and to encourage innovation and competition thus allowing this new source of finance to flourish. It could, for example, be considered that donation and reward-based crowdfunding platforms, due to their nature and the existing tools to prevent abuse, are not regulated; as opposed to the needed regulation of the financial forms of crowd funding.

Moreover, in order to allow crowdfunding to maximize its potential and benefit from economies of scale, regulation should aim to promote cross-border investments, instead of building national barriers, thus ensuring a European level playing-field.

3. The role of banks

Although crowdfunding still remains very small in comparison to global bank lending and stock exchange turnover, crowdfunding stands as an attractive route for start-ups that have shown spec-tacular growth in the funds collected on crowdfunding platforms.

a. Crowdfunding for start-ups

Equity-based crowdfunding may be a viable alternative to raising capital for start-ups and small businesses.

As most start-up projects are innovative and must be considered as risky, they are hardly likely to attract traditional bank financing. This doesn’t necessarily mean that banks shouldn’t have a role to play in this new industry.

Indeed, the participation of banks in this sector could well assist in the consolidation of the business and the enhancement of its potential, as banks could, for example, set up a platform for bringing potential fundraisers and investors together to promote and finance local projects. Mixed financing opportunities might emerge, as banks could, for example, agree to finance a percentage of such projects with the remainder of the funding coming from local investors; therefore benefiting from the "collective intelligence" of the crowd as a measurement of a project's potential and would also contribute to sharing the risk.

On the other hands, banks could bring in their expertise and play a role in the identification of fund-raisers (KYC) as “local” partners of crowdfunding platforms, therefore significantly reducing fraud risks. As a positive side-effect, banks would have the opportunity of remaining the primary point ofcontact for start-ups, even without providing funding to these projects. This assessment of fundrais-ers could be completed before or after filing a project, but in any case before any fund transfer.

​Banks will most certainly also contribute in providing secure and reliable payments systems, and they might act as trustee and as depositary bank for securities.

b. Crowdfunding for individuals (peer-to-peer lending)

As to peer-to-peer lending, it must be noted that most borrowers are people without access to tradi-tional sources of financing (i.e. banking). As they won’t get a “traditional” loan coming from a bank (high risk profile), they are ready to accept high interest rates and, often, less convenient customer service, in exchange for their loan.

While banks have only little interest in participating in the funding of these loans, they might well contribute to the process as service provider or local partner: Identification of borrowers (KYC), provision of payment systems, etc. They might also provide some standardized assessment of the applicators’ creditworthiness, therefore providing guidance to investors.